Financial Accounting II.

Academic year 2023-2024

LESSON 1

THE REGULATORY FRAMEWORK OF

ACCOUNTING IN SPAIN. THE GENERAL
ACCOUNTING PLAN

CONTENTS
1. Regulatory framework of accounting in Spain. Background
2. The European regulatory framework of accounting: IAS/IFRS
adopted by the EU
3. Adaptation of the Spanish regulatory framework of accounting to
the IASB model
4. The General Accounting Plan (GAP)
4.1. Basics and structure of the General Accounting Plan
4.2. Part I: Accounting Framework
4.2.1. Purpose of the annual accounts: Fair presentation
4.2.2. Requirements of the information to be included in the annual accounts
4.2.3. Accounting principles
4.2.4. Components of the annual accounts
4.2.5. Recognition criteria for elements of annual accounts
4.2.6. Measurement criteria
4.3. Part II: Recognition and Measurement Standards
4.4. Part III: Annual Accounts
4.5. Part IV: Chart of Accounts
4.6. Part V: Definitions and Accounting Entries
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 LEARNING RESULTS FOR THE LESSON

– Understand the need for accounting standardisation

and the objectives pursued with this process.

– Know the legal framework of accounting regulation in

Spain.

– Know the characteristics, objectives and structure of

the GAP.

1. Regulatory framework of accounting in Spain. Background

Accounting standardisation: it is a regulated and organised activity that, by developing
and issuing accounting standards, aims to achieve homogeneous behaviour in the
elaboration and presentation of financial information.
When the accounting standard setting process is carried out by governmental bodies
through legal provisions and is based in the use of charts of accounts, it is known as
Accounting Planning.

Background:
¾ The first Spanish GAP was approved in 1973 (voluntary application).
¾ 1986. Spain joins the EU. Spanish standards have to be adapted to the European
Directives [Fourth directive: annual accounts of certain types of companies (1978); Seventh
Directive: consolidated accounts (1983)].
¾ Law 19/1989, Partial Reform and Adaptation of Commercial Laws to the Directives.
¾ Royal Decree 1643/1990, General Accounting Plan (mandatory application).
¾ Since the late eighties, the Instituto de Contabilidad y Auditoría de Cuentas (ICAC)
has been the body in charge of accounting standard setting in Spain. There are other
regulatory bodies: Banco de España, Dirección General de Seguros and Comisión
Nacional del Mercado de Valores, which have competence in their respective fields.
¾ ICAC issues other compulsory accounting regulations (sector-specific adaptations
of the GAP, Resolutions).
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2. The European regulatory framework of accounting:
IAS/IFRS adopted by the EU
The European Directives achieved a low level of harmonization.
In a context of increasing globalization of the economic activity this is a problem
for business entities Æ European companies that wanted to be listed in the US had
to re-elaborate their financial statements using the US GAAP.

In 2000, the European Commission, with the aim of achieving higher levels of
comparability in the accounting information of European companies, recommended
that the consolidated annual accounts of listed companies be prepared
applying the accounting standards and interpretations issued by the International
Accounting Standards Board (IASB).

The IASB is an independent standard-setting body. It is a private body, not

linked to any public institution, and was created in 1973. Its publications include:
- Accounting Standards [International Accounting Standards (IAS, issued from
1973 to 2001) and International Financial Reporting Standards (IFRS, issued
from 2001)
- Interpretations of the Accounting Standards
- …
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Regulation (EC) No 1606/2002/EC of the European Parliament and of the Council,

of 19 July 2002, on the application of international accounting standards:
- Since 2005, all listed EU companies must prepare their consolidated
financial statements in accordance with the IAS/IFRS (adopted by the EC).
- Member States have to decide whether to require or allow the direct
application of IAS/IFRS to the individual accounts and/or to the consolidated
financial statements of unlisted groups.

Among the Standards issued by the IASB, we can distinguish:

- Accepted standards (IFRS-EU): established in the Regulation of adoption of
certain IAS/IFRS (current version: Regulation 2023/1803; first version approved
in 2003).
- Pending acceptance standards: IAS/IFRS that have been issued by the IASB
but have not yet been accepted by the European Commission.
Only accepted standards (IFRS-EU) are compulsory for the preparation of the
consolidated financial statements of listed EU companies.
New challenges for corporate reporting in large companies and listed
companies: sustainability reporting, covering environmental, social and
governance (ESG) matters. Directive (UE) 2022/2464. European Sustainability
Reporting Standards (ESRS) 2023.
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 3. Adaptation of the Spanish regulatory framework of
accounting to the IASB model
In 2001, a Commission of Experts was established to draw up a report with their
recommendations for the adaptation of the Spanish legislation to IAS/IFRS accepted by the
EU (IFRS-EU). The White Book to reform Spanish Accounting was published in 2002.

Following the recommendations of the Commission of Experts, Law 62/2003:

- maintained the Spanish regulations (which had to be adapted to introduce the
requirements of IFRS-EU) for the individual annual accounts;
- permitted the option to apply either IFRS-EU or Spanish standards for the consolidated
financial statements of unlisted groups.

To date, this adaptation process has led to the publication of:

- Law 16/2007, adapting Spanish commercial law to EU regulations.
- Royal Decree 1514/2007, approving the GAP.
- Royal Decree 1515/2007, approving the GAP for Small and Medium-sized
Enterprises (SMEs) and Accounting Principles for Micro-enterprises.
- Royal Decree 1159/2010, approving the Standards for the Preparation of
Consolidated Annual Accounts.
- RD 602/2016 modifying, among others, the GAP and GAP for SMEs (Dec 2016).
- RD 1/2021 modifying, among others, the GAP and GAP for SMEs (January 2021).
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In summary, IFRS-EU have been applied to the consolidated annual accounts of

listed groups since 1/1/2005. However, at present, most Spanish accounting
regulations are already harmonized with the new criteria of the EU.

Commercial accounting regulations

REGULATORY IMPLEMENTATION
EU STANDARDS BASIC LAWS
LEVEL STANDARDS
- Directive 2013/34* - Companies Act (Texto - GAP, 2007 - Sector-specific
- European Refundido de la Ley de - GAP for SMEs, 2007 adaptations of the
Accounting

Regulations adopting Sociedades de Capital, - Standards for the GAP

IAS/IFRS 2010) preparation of - ICAC Resolutions
- Other special laws consolidated annual - Other implementation
* Directive 2013/34 (on accounts, 2010 standards
the annual financial - Mercantile Register
statements) repealed Regulations
Directives IV and VII. (Reglamento del
Registro Mercantil)
- VIII Directive - Audit Law (Ley de - Audit Regulation - Implementation
Auditing

Auditoría de (Reglamento de standards

Cuentas, 2015) Auditoría, 2021)

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 Applicable accounting regulations in Spain
CONSOLIDATED ANNUAL ACCOUNTS
LISTED LEGALLY REQUIRED (since 1/1/2005): IAS/IFRS adopted by the EU (IFRS-EU)
GROUPS
UNLISTED OPTION (since 1/1/2005):
GROUPS - IFRS-EU (no possibility to return to the Spanish model)
- Spanish Standards for the preparation of consolidated annual accounts
INDIVIDUAL ANNUAL ACCOUNTS
COMPANIES LEGALLY REQUIRED (since 1/1/2008 ): Spanish accounting legislation (GAP)
(regardless of
their legal Companies can OPTIONALLY apply the GAP for SMEs (at least for 3 years) when they
form: sole- meet at least 2 of the following conditions, for 2 consecutive years, at the balance sheet
trader, limited date: Figures established by R.D.
company … , - Total assets ” €4,000,000 602/2016. The transposition of
listed or - Total annual revenue (turnover) ” €8,000,000 Delegated Directive (EU) 2023/2775
unlisted) - Employees: ” 50 might affect these figures
Not applicable: 1. Public interest companies (e.g. companies with listed securities); 2.
Belong to a group that should consolidate; 3. Functional currency different from the
euro; 4. Financial institutions.

Companies that have chosen to apply the GAP for SMEs can OPTIONALLY apply the
Accounting Principles for Micro-enterprises (at least for 3 years) when they meet at
least 2 of the following conditions, for 2 consecutive years, at the balance sheet date:
- Total assets ” €1,000,000
- Total annual revenue ” €2,000,000
- Employees: ” 10 9

4. The General Accounting Plan (GAP)

4.1. Basics and structure of the General Accounting Plan

Scope of application: the preparation of individual annual accounts by all

Spanish companies (except for the financial sector, which has special rules).
Æ IAS/IFRS adopted by the EU (IFRS-EU) do not directly apply to individual annual
accounts.

Mandatory application since 1/1/2008, regardless of the legal form of the company
(although in some cases the GAP for SMEs can be applied).
Æ However, the application of two of the parts of the GAP is optional: Part 4 (Chart
of accounts) and 5 (Definitions and accounting entries).

The GAP is the basic accounting regulation, but other standards apply (sector-
specific adaptations …)

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 STRUCTURE OF THE GENERAL ACCOUNTING PLAN

MANDATORY/
PART NAME
VOLUNTARY

I Accounting Framework Mandatory

Recognition and
II Mandatory
measurement standards
III Annual accounts Mandatory

IV Chart of accounts Voluntary

Voluntary
Definitions and
V (except what refers to
accounting entries recognition and measurement
criteria, that are mandatory)

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4.2. PART I: Accounting Framework

The Accounting Framework includes the accounting principles and basic
concepts necessary for the elaboration and presentation of accounting information
for external users.

Summary of main contents of the Spanish Accounting Framework:

The objective of the annual accounts is to give a fair presentation of the equity,
financial position and results of the company.
Accounting principles: going concern, accrual, consistency, prudence, offsetting
and materiality.
Other basic concepts:
- Disclosure requirements in the annual accounts (relevance and reliability)
- Components of the annual accounts (Assets, Liabilities, Equity, Income,
Expenses)
- Recognition criteria for elements of the annual accounts
- Measurement criteria

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 4.2.1. Purpose of the annual accounts: Fair presentation
The systematic application of the accounting requirements, principles and criteria set
out in the GAP should ensure fair presentation of the equity, financial position and
results of the company in its annual accounts.
The annual accounts should be written clearly so that the information is useful to
the user when making decisions of an economic nature.
Æ Transactions shall be accounted for in accordance with their economic reality
and not merely their legal form (substance over form).

The following situations are considered:

- When compliance with the accounting requirements, principles and criteria set out
in the GAP is not considered sufficient to ensure fair presentation, the notes to
the annual accounts should include any additional disclosures considered
necessary.
- In exceptional cases in which compliance with a requirement would be
misleading and would conflict with the objective of fair presentation, the
company shall depart from that requirement and provide sufficient
disclosure in the notes to the annual accounts of this departure and the impact
on the equity, financial position and results of the company.
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4.2.2. Disclosure requirements in the annual accounts

Relevance: Information is relevant when it is useful for making economic decisions;
in other words, when it helps to evaluate past, present or future events, or to confirm or
correct prior evaluations. To meet this requirement, the annual accounts should
adequately disclose the risks to which the company is exposed.

Reliability: Information is reliable when it is neutral and free from material error; in
other words, when it is unbiased and can be depended on by users to represent faithfully
that which it purports to represent.
Information has the quality of reliability when it is complete, which is achieved when the
financial information contains all data that could have an impact on decision-making and
no significant information is omitted.

Additionally, financial information must comply with the qualitative characteristics of

comparability and clarity.
Comparability: Users must be able to compare the annual accounts of a company
through time as well as those of different companies in order to evaluate their relative
financial position and performance. Comparability requires the treatment of transactions
and other economic events arising in similar circumstances to be consistent.
Clarity enables users of the annual accounts with a reasonable knowledge of
economic activities, accounting and business finance to make judgements that facilitate
their decision-making, after a diligent examination of the information provided.
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 4.2.3. Accounting principles
Going concern. Unless there is evidence to the contrary, it shall be presumed that the
company will continue in operation in the foreseeable future. The aim when applying
the accounting principles and criteria is not to determine the value of the company’s net
equity with a view to disposing of part or the entire business of the company, or the
amount that would be obtained in the event of liquidation.
Where this principle is not applicable, the company shall apply the most appropriate
measurement standards for fair presentation of the transactions carried out to realise
assets, settle debts and, where applicable, distribute the resulting equity. The company
should include relevant information on the criteria applied in the notes.

Accrual. The effects of transactions and other economic events shall be recognised
when they occur. The related expenses and income shall be recognised in the annual
accounts for the reporting period to which they relate, irrespective of the payment
or collection date.

Consistency. Once a criterion has been selected from amongst the available options,
this should be maintained over time and applied consistently to similar transactions,
events and conditions, insofar as the circumstances that gave rise to its selection remain
unchanged. If the circumstances change, a different policy could be applied and
details of this situation should be disclosed in the notes, indicating the quantitative and
qualitative effect of the variation on the annual accounts.
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Prudence. Prudent criteria should be applied when estimates and measurements are
made in conditions of uncertainty. However, prudence when measuring assets and
liabilities is not justified if the fair presentation of the annual accounts is affected.
Only profits obtained before the end of the reporting period shall be recognised.
However, all risks arising during the current or prior reporting periods should be taken
into consideration as soon as they become known, even if they only come to light
between the balance sheet date and the date the annual accounts are officially drawn up
by the directors. [Exception: article 38 bis of the Commercial Code].
Asset amortisation, depreciation and impairment should be reflected, irrespective of
whether the result for the reporting period is a profit or a loss.

Offsetting. Assets and liabilities, and income and expenses, shall not be offset
unless expressly permitted by a standard. The components of the annual accounts shall
be measured separately.

Materiality. Strict application of certain accounting principles and criteria may be

waived when the quantitative or qualitative materiality of the variation arising as a result
is of little significance and, therefore, does not affect fair presentation. When items or
amounts are not material, these may be aggregated with other items of a similar nature or
function.

Where accounting principles conflict, the criterion that best ensures fair
presentation of the equity, financial position and results of the company should prevail.
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 4.2.4. Components of the annual accounts
Balance sheet:
¾ Assets: goods, rights and other resources controlled by the company as a
result of past events and from which future economic benefits are expected to
flow to the company.
¾ Liabilities: present obligations of the company arising from past events, the
settlement of which is expected to result in an outflow of resources from the
company embodying future economic benefits. Liabilities shall include provisions.
¾ Equity: the residual interest in the assets of the company after deducting all
its liabilities. Equity includes contributions made by equity holders or owners upon
incorporation of the company or subsequently that are not considered as liabilities,
as well as retained earnings and cumulative losses or other related variations.
Income statement or Statement of changes in equity:
¾ Income: increases in the company’s equity during the reporting period in the
form of inflows or enhancements of assets or decreases in liabilities, other than
those relating to monetary or non-monetary contributions from equity holders or
owners.
¾ Expenses: decreases in equity during the reporting period in the form of
outflows or depletions of assets or incurrences of liabilities, other than those relating
to monetary or non-monetary distributions to equity holders or owners.
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4.2.5. Recognition criteria for elements of annual accounts

Recognition is the process of incorporating items that meet the definition of an
element of the annual accounts into the balance sheet, income statement or statement
of changes in equity.

Items shall be recognised when they meet the definitions set out in the preceding
section and satisfy the following requirements:
- Relevance: probability criteria relating to inflows or outflows of resources that embody
economic benefits, and
- Reliability: when their value can be measured reliably.

For example:
An asset shall be recognised in the balance sheet when it is probable that the future
economic benefits will flow to the company, and provided that the value of the asset
can be reliably measured. Recognition of an asset entails simultaneous recognition of a
liability, the decrease in another asset or recognition of income or other increases in
equity.
Income shall be recognised when there is an increase in the company’s resources
that can be reliably measured. Recognition of income therefore occurs simultaneously
with the recognition or increase of an asset or the extinguishment or decrease of a
liability and, on occasions, the recognition of an expense.
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 4.2.6. Measurement criteria
Measurement is the process of assigning a monetary amount to each element of the
annual accounts.
¾ Historical cost or cost. Cost of acquisition or production of an asset.
¾ Fair value. The price that would be received to sell an asset or paid to transfer or cancel a
liability in an orderly transaction between market participants at the measurement date. FV is
determined without deducting any transaction cost necessary to make the sale. The amount a
company would receive or pay in a forced transaction shall not be considered as FV.
¾Net realisable value. Amount the company can obtain by selling the asset in the market
in the ordinary course of business, less the costs necessary to make the sale.
¾ Value in use. Present value of the future cash flows expected to be obtained through its
use in the ordinary course of business, taking into consideration its present state, discounted
at an appropriate rate.
¾ Amortised cost. The amortised cost of a financial instrument is the amount at which the
financial asset or financial liability is measured at initial recognition less any principal
repayments, plus or minus any difference between that initial amount and the maturity amount
recognised in the income statement using the effective interest method.
¾ Carrying amount. Net amount at which an asset or liability is recognised in the balance
sheet, after deducting accumulated amortisation or depreciation and any accumulated
impairment in the case of assets.
¾ Residual value. Estimated amount that the company would currently obtain from
disposal of the asset, after deducting the costs of disposal, if the asset was already of the
age and in the condition expected at the end of its useful life.
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4.3. Part II: Recognition and Measurement Standards

The recognition and measurement standards develop the accounting principles

and other provisions set out in the Accounting Framework. They include the
criteria and rules applicable to different transactions, assets and liabilities from a
general perspective (considering usual business transactions, without going into
the details of particular cases, whose treatment will be resolved by the resolutions
approved by the ICAC).

4.4. Part III: Annual Accounts

The annual accounts comprise the Balance sheet, Income statement, Statement
of changes in equity, Statement of cash flows and the Notes.
This part of the GAP contains the standards for the preparation of annual
accounts and the models of annual accounts (standard and abbreviated).

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Balance sheet: comprises assets, liabilities and equity of the company, which shall
be disclosed separately.

Income statement: reflects the profit or loss for the reporting period, comprising
income and expenses for the period, except those recognised directly in equity in
accordance with the recognition and measurement standards.

Statement of changes in equity: discloses all changes in equity during the

reporting period: income and expenses (recognised in profit or loss or directly in
equity) and all other changes in equity.

Statement of cash flows: discloses the origin and use of monetary assets
representing cash and cash equivalents. Movements are classified by activity (from
operating activities, investment activities and financing activities), indicating the net
change in the balance for the reporting period.

Notes: complement and expand upon the information provided in the other
documents comprising the annual accounts.

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Balance Sheet (abbreviated format)

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 23

Income statement (abbreviated format)

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 4.5. Part IV: Chart of Accounts
GROUP 1 Basic financing
GROUP 2 Non-current assets
Accounts of
GROUP 3 Inventories
Balance sheet
GROUP 4 Trade payables and trade receivables
GROUP 5 Financial accounts
Accounts of GROUP 6 Purchases and expenses
Expenses and income GROUP 7 Sales and income
Accounts of GROUP 8 Expenses recognised in equity
Expenses and income
recognised in equity GROUP 9 Income recognised in equity

- The chart of accounts uses the numeral classification system.

- Groups (1 digit); subgroups (2 digits); accounts (3 digits); subaccounts (4 digits).
- The chart of accounts does not try to cover all possibilities in the business world.
Companies can create additional accounts depending on their needs.
- The chart of accounts is not compulsory in terms of numbers and names of the
accounts, although it helps companies to prepare the annual accounts.
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Examples of coding:

GROUP 2. Non-current assets

SUBGROUP 28. Accumulated amortisation and depreciation
ACCOUNT 281. Accumulated depreciation of property, plant and equipment
SUBACCOUNT 2811. Accumulated depreciation of buildings

GROUP 4. Trade payables and trade receivables

SUBGROUP 47. Public entities
ACCOUNT 475. Taxation authorities, taxes payable
SUBACCOUNT 4752. Income tax payable

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 4.6. Part V: Definitions and Accounting Entries

- Definitions: a definition is provided for each group, subgroup and account,

indicating the most significant content and characteristics of the transactions and
economic events they represent.
- Accounting entries: describe, albeit not exhaustively, the most common cases
for debits and credits to the accounts. In the case of transactions for which the text
does not explicitly stipulate the accounting treatment, the general criteria set out in
the GAP will be used.

Example of definitions and accounting entries:

(640) Salaries and wages
Fixed and variable remuneration of company employees.
The full amount of remuneration accrued shall be debited to this account:
a1) For cash payment, with a credit to accounts in subgroup 57.
a2) For accrued remuneration payable, with a credit to account 465.
a3) For compensation of pending debt, with a credit to accounts 254, 460 and 544,
as appropriate.
a4) For personnel tax withholdings and Social Security contributions, with a credit to
accounts in subgroup 47.
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Summary of the General Accounting Plan

Mandatory
Part Name
/ voluntary
Accounting Framework
Objective: achieve fair presentation of the annual accounts
Accounting principles: going concern, accrual, consistency, prudence,
I Mandatory
offsetting and materiality
Other basic concepts (disclosure requirements, components of the annual
accounts, recognition and measurement criteria)
Recognition and measurement standards
II Develop the accounting principles and other provisions set out in the first Mandatory
part, grouping these standards by transactions, assets and liabilities
Annual accounts
Balance sheet, Income statement, Statement of changes in equity,
III Mandatory
Statement of cash flows and the Notes
Standards for the preparation and models (standard and abbreviated)
Chart of accounts
IV List of accounts, properly grouped (9 groups) and divided [groups (1 digit); Voluntary
subgroups (2 digits); accounts (3 digits); subaccounts (4 digits)]
Definitions and accounting entries
The definitions explain the contents of the groups, subgroups and accounts
V Voluntary
The accounting entries explain the most common situations for debits and
credits to the accounts 28